A few companies are finding it's better to reduce costs than lay off employees

Jay Hancock

Maybe it's better to cut costs, not people

November 07, 2001|By Jay Hancock

THE layoff became corporate America's favorite cost-cutting act in the 1990s, a tactic so popular on Wall Street that companies would exaggerate the extent of their firings to boost share prices.

The downside of downsizing, however, eventually made business executives pause and reflect.

Not out of concern for people who lost their jobs. Are you kidding? Out of concern for shareholders and profits.

When the economy went on the boil late last decade, the problem for many companies became too few workers, not too many.

In Maryland, where the unemployment rate hit a low of 3.4 percent in the summer of 1999, the employee shortage probably shaved $1 billion or more off annual economic output. The top beef among local business people went from taxes or regulation to labor supply, labor supply, labor supply.

Businesses also figured out that layoffs could hurt morale enough to hinder productivity and that even in lean times it is possible to damage a business by shedding too many workers.

So some executives are having second thoughts about firing up the chainsaw again.

"We've just gone through, in the last three or four years, one of the most intensive wars for talent," says Robert Morgan, a human resources consultant with Spherion Corp. of Fort Lauderdale, Fla. "People are coming out of that pretty fresh, so to turn around, almost on a dime, and lay people off is sort of a culture shock. And people are questioning whether they should do that."

That doesn't mean companies don't want to control personnel costs as much as they ever did. Sales have dropped sharply at many firms, and managers are under pressure to chop payroll expenses into line with revenue.

They just want it both ways. Lower labor expenses and plenty of workers. Is that asking too much?

Some companies are giving it a whirl. They're reducing or forgoing layoffs and instead cutting employee pay across the board.

Manugistics Group is one outfit on this tack. The Rockville maker of supply-chain software said last month that, in addition to 180 layoffs, remaining employees would take three unpaid days off every four weeks, thus achieving a 15 percent pay cut.

"It allowed us to keep more people employed, and we think it better positions us as the economy starts to turn back up," Manugistics boss Gregory J. Owens told The Sun.

That's the idea. Hang onto your crew, hunker down and wait for a break in the clouds. And if you can portray the move as a humanitarian, "share the pain" lesser of two evils, so much the better.

I've come across some two dozen U.S. companies, big and small, that have slashed pay broadly in recent weeks. Wall Street, where compensation always swings sharply between mere feast and full gluttony, doesn't count.

The pay parers include airlines, struggling to recover from terrorist attacks, and Bethlehem Steel, which is seeking wage concessions as part of its bankruptcy process.

Economists have wondered since at least the 1950s why worker pay doesn't shrink more often in slumps. Classic economic theory holds that the price of labor, like that of any product, should decline when demand falls.

But it doesn't. Not even (very much) in the Great Depression, as shown in a 1996 paper by Princeton's Ben Bernanke and American University's Kevin Carey.

If wages really did rise and fall in sync with demand, recession's trauma would be more widely spread but more easily borne. Workers who would have been fired would instead stay on the payroll - with a financial buzz cut.

Unemployment would be lower. What's better: 5 percent of workers losing jobs, or the entire work force getting a 5 percent wage cut?

I asked several labor economists and human resources pros whether we might be entering a stage of even slightly more wage flexibility. Most were skeptical.

Businesses that cut pay in lieu of job cuts still carry heavy benefits expenses; that's an incentive for layoffs, analysts said. Broad pay cuts can hurt morale even more than firings, especially if workers suspect the company is doing better than management says.

But at the same time, analysts said, U.S. businesses know better than they did five years ago that workers don't grow on trees.

"I had some clients who had cost issues. What they did is cut their marketing and advertising, not people," said Paula Singer, head of the Singer Group, a Baltimore personnel consultant. "To me the big shock is seeing how far both public and private organizations are going to keep good people" even in the downturn.

Companies routinely laud employees as "our most valuable resource." Thanks to the worker drought of the 1990s, some of them now believe it.